Non-Exclusive Data Boosts Industry

Shared Info Lowers Cost Barriers

It's a given that 3-D seismic data revolutionized the E&P industry. Yet were it not for the advent of non-exclusive data, the impact of 3-D seismic likely would be far less pronounced.

Indeed, it is the widely available, relatively inexpensive non-exclusive data that placed the power of this cutting edge technology into the hands of everyone from the super-size major to the small independent.

But with the E&P players continually hungry for more and better data at increasingly lower cost, the data acquirers must be ever more vigilant to ensure their invaluable asset brings in an acceptable revenue stream.

"The revenue generated by non-exclusive data licensing is presently the lifeblood of the geophysical industry," said Doug Elrod, business development manager at Schlumberger/Geco-Prakla. "As such it not only keeps the industry afloat, it also pays for research and development, which in turn assures the vital efficiency gains needed for the future of the exploration business."

Elrod provided an overview of the non-exclusive data business at the November IAGC-sponsored conference "Current Issues In Non-Exclusive Geophysical Data ...The Exploration Tool of Choice," presenting a paper co-authored with Geco-Prakla marketing manager Robin Walker.

Non-exclusive data in the petroleum industry are data that are owned by a geophysical or data company and licensed for a fee to E&P companies under a non-exclusive use license. The license carries restrictions that are needed to protect the value of the asset for the owner.

Because it is non-exclusive, any number of companies can buy licenses to the same data. The price is some fraction of the cost of creating the data, and it is related to the number of licenses the owner anticipates selling.

It is common to hear the terms multi-client, spec and non-exclusive with regard to these data. Today, however, these terms are synonymous and encompass a range of variations on the modern non-exclusive business model.

Many types of data are licensed under the non-exclusive model in the oil industry, including gravity and magnetic, geological and paleo, certain types of satellite imagery and others. In terms of capital investment, however, 2-D and 3-D seismic are the industry's most significant data, generating several positive side effects.

"Inexpensive seismic data delivered via the non-exclusive model have significantly lowered the barriers to regional exploration," Elrod said. "And this has allowed even the small independents to participate with drilling success rates equal to that of the majors during the '80s and early '90s.

"Non-exclusive seismic was quickly embraced by national oil companies and the governments they represent, and concession work commitments related to 3-D seismic now are normally accepted in the form of non-exclusive data licensing," he said.

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It's a given that 3-D seismic data revolutionized the E&P industry. Yet were it not for the advent of non-exclusive data, the impact of 3-D seismic likely would be far less pronounced.

Indeed, it is the widely available, relatively inexpensive non-exclusive data that placed the power of this cutting edge technology into the hands of everyone from the super-size major to the small independent.

But with the E&P players continually hungry for more and better data at increasingly lower cost, the data acquirers must be ever more vigilant to ensure their invaluable asset brings in an acceptable revenue stream.

"The revenue generated by non-exclusive data licensing is presently the lifeblood of the geophysical industry," said Doug Elrod, business development manager at Schlumberger/Geco-Prakla. "As such it not only keeps the industry afloat, it also pays for research and development, which in turn assures the vital efficiency gains needed for the future of the exploration business."

Elrod provided an overview of the non-exclusive data business at the November IAGC-sponsored conference "Current Issues In Non-Exclusive Geophysical Data ...The Exploration Tool of Choice," presenting a paper co-authored with Geco-Prakla marketing manager Robin Walker.

Non-exclusive data in the petroleum industry are data that are owned by a geophysical or data company and licensed for a fee to E&P companies under a non-exclusive use license. The license carries restrictions that are needed to protect the value of the asset for the owner.

Because it is non-exclusive, any number of companies can buy licenses to the same data. The price is some fraction of the cost of creating the data, and it is related to the number of licenses the owner anticipates selling.

It is common to hear the terms multi-client, spec and non-exclusive with regard to these data. Today, however, these terms are synonymous and encompass a range of variations on the modern non-exclusive business model.

Many types of data are licensed under the non-exclusive model in the oil industry, including gravity and magnetic, geological and paleo, certain types of satellite imagery and others. In terms of capital investment, however, 2-D and 3-D seismic are the industry's most significant data, generating several positive side effects.

"Inexpensive seismic data delivered via the non-exclusive model have significantly lowered the barriers to regional exploration," Elrod said. "And this has allowed even the small independents to participate with drilling success rates equal to that of the majors during the '80s and early '90s.

"Non-exclusive seismic was quickly embraced by national oil companies and the governments they represent, and concession work commitments related to 3-D seismic now are normally accepted in the form of non-exclusive data licensing," he said.

"Several countries encourage non-exclusive data investments by offering better terms to seismic contractors than to oil companies directly in terms of data exclusivity periods."

Lots of Lines

The age of modern non-exclusive data began in the early 1980s. Since then, the quantity, quality and value of the non-exclusive data libraries of the world has increased dramatically, according to Elrod, who conducted a private survey with Walker to determine the sizes of the accumulated non-exclusive data libraries worldwide today.

Survey results reveal a total 4,132,996 kilometers of 2-D seismic, of which approximately 82 percent is marine and the remainder land and transition zone. The 3-D seismic tally is 891,224 square kilometers, with 93 percent allocated to marine and the rest principally to land and transition zone.

To present a more direct comparison of the quantity of 2-D data versus 3-D, Elrod and Walker converted the 3-D data to CDP line kilometers by multiplying by the number of CDP line kilometers per square kilometer. They determined there are more than 28 million line kilometers of 3-D non-exclusive data in the world.

It came with a huge price tag.

The geophysical industry as a whole is estimated to have invested $11.4 billion in non-exclusive data libraries worldwide over the past four decades, according to Elrod and Walker. Of this, they estimate about $9.9 billion was invested in the '80s and '90s, with $6.4 billion of this invested solely in the '90s.

The demand for 3-D seismic is strikingly accentuated when considering that in little more than 10 years the industry's cumulative investment in 3-D data surpassed its cumulative investment in 2-D data spread over a period of four decades.

While the global volume of non-exclusive data available to the E&P industry has expanded dramatically via massive capital investments, the price of the data to the user has been falling.

"In comparing the cost to acquire a 30-block 3-D survey on a proprietary basis in 1990 using triple streamer/dual source technology with the cost to license 30 blocks of non-exclusive 3-D data acquired in 1999 using six-streamer technology, there has been a 1,000 percent price improvement to the user," Elrod said.

"This gain has come roughly half from technology advancements and half from the non-exclusive business model itself."

The More the Merrier

The non-exclusive data business is based on making multiple sales of a survey, with each sale priced at some fraction of the cost of creating the data.

The sales potential of a new survey may be considered in terms of the anticipated number of full sales of the data set at an average sales price. A full sale occurs when the equivalent of the complete volume of data has sold one time. For instance, a full sale of a 100-block marine survey could occur with five licenses of 20 blocks each or two licenses of 50 blocks each.

When planning a new investment, the owner estimates the number of full sales by adding the probability weighted sales estimates and then prices the data to ensure recovery of the investment and an acceptable return at an acceptable rate

The timing of sales is crucial to the investment, and revenue is considered in terms of pre-sales and late sales.

♦  Pre-sales, which are license sales made by the owner before or during the acquisition of the data, control the initial risk taken by the owner.

♦  Late sales, which occur after the risk has been taken by the owner and/or when the data are ready to be delivered, produce the return on investment.

Because the capital at risk up front by the owner is equal to the cost of the data minus any pre-sales that are secured, the risk level can range from zero to 100 percent.

The key factor in risk assessment is market size. For instance, in certain international settings where the entire market may be only two to four companies, a non-exclusive 3-D seismic data investment without very high pre-funding is not feasible.

Variations

Geology plays a major role in controlling market size.

One allure of the Gulf is the massively thick sedimentary section that is seemingly limitless in its potential for new discoveries. Couple this with a stable political climate, a simple regulatory system, annual area-wide lease sales and a fair and transparent bidding process, and you have many companies clamoring to compete.

Prior to the current merger activity, there were maybe 60 companies that licensed 3-D non-exclusive data on the Gulf of Mexico shelf, with perhaps 25 of these licensing data in significant quantities. In the deep water there were about eight to 12 clients licensing significant quantities of data.

Market consolidation looms as a major risk factor in today's non-exclusive data business. Say, for instance, license fees have been set for a proposed new survey, but two companies that were considered probable licensees merge with one another. A loss of one licensee may be a significant percentage of total probable sales.

Still, it could be worse if the company being acquired had licensed portions of the data and the acquiring company was allowed to obtain a license via the acquisition or merger. Such activity was curtailed by litigation in the late 1980s. This resulted in an amendment to the IAGC model license contract to ensure that a company could not acquire a data license except by purchasing it from the owner.

Today, a licensee is granted the right to use the data to conduct internal business but is prohibited from disclosing, transferring or copying the data to any other parties. This prohibition extends to asset sales and corporate mergers.

While contract provisions vary between companies, a data license terminates in the event of a merger, acquisition or effective change of control of the licensee unless the acquiring company or surviving entity agrees to pay a subsequent license fee or "transfer fee."

In situations where the market size may be small and/or the unit cost of data very high, some companies have experimented with alternative business models to justify investment in non-exclusive surveys. Usually some form of production payment or success bonus is paid by the licensee to the data owner in addition to a license fee.

Production-based payments might include a carried working interest, net profits interest or an overriding royalty. Success bonus payments can include a fixed "lease fee" paid when a lease is secured, a "spud fee" paid on commencement of drilling, or a "completion fee" paid on completion of a commercial discovery. When success bonus fees are applied, most companies take careful measures to avoid conflicts with other clients.

The trend among some of the companies to take equity participation has triggered numerous debates about the ethical issues involved. For those non-exclusive companies taking equity, most have realized they must separate the equity-taking component into a unique business unit to be organizationally and financially viable, according to Elrod. He noted that Schlumberger does not take equity positions.

Granted, the current merger mania is wreaking its bit of havoc on the non-exclusive data target client base, but technology stands ready to carry the geophysical industry over this obstacle. Multi-component, or 4-C, marine surveys are beginning to be acquired under the non-exclusive model. These surveys record the full vector wavefield of pressure, vertical velocity and the X and Y components of velocity.

This approach has the ultimate goal of direct quantitative estimations of lithology and pore fluids.

Should this at some point lead to a method for direct detection of remaining hydrocarbon accumulations in a mature basin, such vast areas as the entire Gulf of Mexico would be ripe for new data acquisition.

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